Two Agents that Made a Great Bull Market Risk-free

A great bull market involving stocks, commodities, and low grade bonds ran
for a number of years and completed in 1873. During the latter part of it,
Europe suffered a war and, with the usual strains found in credit markets,
the establishment found two features that would eliminate risk.

One was that Treasury Secretary Richardson had immense abilities and powers
that would prevent anything going wrong. Then, backing this up, was that the
undersea telegraph cables could render the immediate transfer of the precise
amount of liquidity to extinguish a problem.

A recent article by a well known historian observed that today's instantaneous
news transmission will be less forgiving than in the past. Also noted was that
long-distance communications "were a bit patchy" as far back as 1914.

This seems to be a limited step towards fully appreciating the role of "instantaneous
communications" and phases of great excitements in the financial markets. Indeed,
long distance communication was virtually made instantaneous in the late 1860s
with wire services provided by cross-channel and transatlantic cable systems.

This, as well as the speed of the "new" ticker tape machines were important
parts of the bubble in stocks, corporate bonds, and commodities that blew out
in September, 1873. Western Union Telegraph was the popular big-cap high-tech
stock.

On the way up the boom, the enthusiasm went beyond individual high-tech favourites
and formed a consensus that instantaneous communication would provide ready
assistance in staving off a liquidity problem. This was reviewed in contemporary
publications.

The initial whiff of panic arrived in late September with the failure of Jay
Cooke and Co. The immediacy of transmission is best appreciated by quoting
directly from the October 4, 1873 edition of The Economist:

"The failure ...was known in London to the most important American houses,
we believe, the very evening of its occurrence, and to all the world next
morning."

As Cooke was a huge underwriter and distributor of bonds, the failure was
serious. The article mentioned "cable transfers", which The Economist pointed
out was the same as if "an indefinite amount" of liquidity had actually arrived.

The article observed that without this assistance the distress would have
been greater than at anytime in the past. The words almost glowed:

"The contrast between what has happened now and what has happened in
1857, when there was no telegraph, is sufficiently striking. The American
crisis of that year broke out at the end of September, but news did not
reach England till nearly the middle of October, and shipments of gold [liquidity] were
then started, but could not reach America or be known there till the beginning
of November."

The article concluded with:

"The power [of the cable] gives of using prompt remedies; and
it seems hardly possible to over-estimate the value of the services which
the Atlantic Cable has now rendered."

This was written only a month after the leading New York newspaper, the Herald,
had editorialized that the power of central government could be used to avert
panics. Secretary of the Treasury, Richardson's, esteem was considerable and
most believed proof against liquidity problems. At the time, the U.S. was between
experiments in central banking and absent such an agency with the hindrance
of a gold-convertible currency, it was argued that the Treasury could issue
any amount of liquidity to stave off any problem.

The ironies with and subsequent to the appearance of financial stringency
in that fateful September of 1873 are worth reviewing. The stock market crashed
through October such that Western Union plunged from $90 in mid-September to
$46 at the end of October. The instruction is that even with instantaneous "cable
transfers" a highly speculative financial market recorded yet another typical
September to November catastrophe.

Then, despite more time for more assistance, the global bear market endured
until 1878.

This was accompanied by a global business contraction that lasted to 1879,
afflicting most standards of living.

In 1874, the New York Commercial Chronicle reviewed the damage and The Economist
summarized the study, in part, with:

"The almost universal excitement of 1871-73 had thoroughly disorganized
both labour and commerce. The working people became intoxicated and unrestrained
under rapid advances of wages and rapid diminution of the hours of work [due
to trade union power]; and the excessive profits of the coal, iron,
shipping, and other trades introduced into ordinary business a degree of
recklessness which can only end in mischief."

As with the previous great bubble that climaxed in 1825, the post-1873 contraction
was lengthy. The U.K. was the senior economy and leading economists called
the period from 1873 to 1895 as "The Great Depression".

The ultimate irony was that economists were still analyzing "The Great Depression" as
to how it happened, or been ameliorated, or even avoided - well into the 1930s.

This review briefly covers a couple of reasons why the establishment stayed
too long during the financial mania that climaxed in 1873, which was fourth
in a series of new financial eras that began in the early 1700s.

From the peak of the last business cycle with the "old" and disturbing era
of inflation, all six such eras ran for nine years. Then the data are available
to the month, which is the case for the 1929 and 2000 examples - the duration
was 116 months.

The other reasons for using the 1873 example is that the U.S. dollar was fiat
and Europe suffered the Franco-Prussian War of 1870 - 1871. Within this, Paris
suffered bombardment and siege that threatened starvation.

So there are some similarities to the recent financial mania as it is being
played out in the U.S.

As to a couple of the reasons why the crowd partied too late in 1873, one
was that the Secretary of the Treasury had immense powers to prevent contraction.
At the height of the boom, the Herald editorialized:

"Power had been centralized in him to an extent not enjoyed by the Governor
of the Bank of England. He can issue the paper representatives of a score
or more of millions ... it is difficult to conceive of any condition or
circumstances which he cannot control."

In so many words, risk had been eliminated. This was reinforced by the new
instantaneous communications that would render immediate assistance, should
any be needed.

Essentially, there are two ways of reviewing financial history - one, the
more popular, is to rewrite with little use of quotation. The other, for full
effect, directly employs rich and vivid quotation.

This brief review will close with another from the always positive Herald.
This irony was in claiming that a panic was not possible. After the initial
phase of the crash (on October 1) the cheerleading continued with:

"A crisis in our financial dealings has been met and passed without
loss of confidence, without fear, largely without distrust. Here are growth,
understanding, increased knowledge, firmer reliance. [We have] safe
engineers in time of peril."

According to mainline economists, The Great Depression ran from 1873 to 1895.
At the height of the 1929 mania, the popular consensus was that the old, destabilized,
and discredited Treasury System had been replaced by the vastly superior Federal
Reserve System - whereby nothing could go wrong.

The opinions in this report are solely those of the author.
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